Dairy farmers’ business resilience will be severely tested,
especially over the next few years until these extraordinary events are resolved or
resume normal trading.

I think we are likely to experience low milk prices for several years. This is not a short term cycle....more likely to be a period of major re-adjustment as supply & demand are completely out of whack!

Farmers need to quickly get control of their cash-flows,
debt servicing and capital spending needs to ‘out of cash surplus’ only.

New Zealand dairy farmers have been ‘farming the milk price’…some
have made decisions based on “an apparently ever increasing milk price”. This
is a very risky strategy especially when there is a very volatile market for
dairy products and a rapidly increasing stockpile of world grain surpluses.
Debt levels have increased dramatically in the past 12 months. One might have
expected debt to be repaid during periods of high milk prices but no….debt has actually
increased! The milk price has increased but so too has the volatility and
uncertainty.

In my last blog I made reference to John Mulvaney (Australian
Dairy Consultant) saying that too many dairy farm businesses are already ‘propped
up by the milk price’. On-farm spending trends with increasing milk prices. The
issue now is can farmers screw back down on-farm spending with a milk price
that has crashed?

Another recent feature of the NZ dairy industry is “Farm
System creep” that is an across the board move to higher input systems with
more imported feed, machinery and complicated systems. As this move occurs to
higher input systems, businesses get more exposed to world market’ volatility,
have smaller profit margins and more operating costs become “sticky” and much
harder to reduce. NZ dairy farms have lost much of their low cost
competitiveness and the competitive advantage of low input pasture based
systems.

Efficient profitable low input-low cost pasture based farm systems
look a good place to be right now.

Move to higher input farm systems

Demand has crashed for global dairy products. China has
effectively withdrawn from the global dairy market so prices have rapidly
fallen. New Zealand has captured opportunities from the Asian market (resulting
in very good farm gate milk prices) but is now exposed to the downside risks. Forty
years ago, 90% of NZ food exports went to the USA and Europe and only 5% to
Asia. Now only 20% go to North America and the EU whereas 50% to Asia. There is
more uncertainty for an already volatile dairy commodity market with Russia
banning most food imports especially from Europe and USA but also Australia.
European surplus dairy & grain has been sold into Russia. Russian Food Ban is Serious

Australia will be hard hit by the Russian ban and NZ will need to politically
tread very carefully. Politically going against the USA, Canada, EU and
Australia, by trading with Russia and not being part of the current movement of
“solidarity with Ukraine”, sounds very risky to me. Pasture based dairy farmers
in countries like Ireland, UK and France could also get caught in the cross
fire as unsold stockpiles mount.

This discussion is not complete without reference to current
cereal prices, world supply of wheat, higher yields, decreased demand for
biofuels and the possible impact of the Russian ban on food imports.

This situation could easily result in a
substantial increase in world milk production. Milk production in EU is already
up on a favourable season in 2014.

Dairy farmers need to budget on a lower milk price with a
healthy safety margin. Expect the milk price to decrease further due to the
uncertainty. Monitoring markets will be
as important as the weather forecast.

Hammer down costs, watch the cash flow
like a hawk and delay capital spending.

The farm spender and the farm budget team member
need to be in the same team, working together.

Very bumpy road ahead!

Put the cheque book away! Suspend capital spending plans

The monitored cash-flow budget will be the most important tool on the dairy farm this year.

Sunday, 20 July 2014

The visual & financial differences between the New
Zealand & Australian dairy industries at the current time are stark and
startling!

Why is the NZ dairy industry booming and Australian dairy farmers
under so much pressure & having to dig deep to remain profitable. Both
dairy industries supply into the same international market and Australia has a
much bigger domestic population and local market. A strong local market is
often argued as being a strength and likely to lift dairy farmers farm gate
price. The economy in both countries is relatively strong & to a large
extent was not greatly affected by the world financial crisis. Yet one dairy industry is hanging in by their fingernails while the other is buoyed (perhaps unrealistically!) by higher milk prices.

Visually as you drive through both countries, you can’t help
but see that the New Zealand dairy farmers are doing well but that their
counterparts in Australia look to be up against it. NZ dairyfarmers are
expanding, investing and generally have had a very profitable year. Milk price
has been high and apart from some areas of drought e.g. Waikato (now floods in
Northland) the season has been kind. Farmers are out spending on machinery
& infrastructure. Apparently numbers at winter industry meetings have been
depleted due to record numbers of dairy farmers holidaying overseas. There have
been record amounts of imported feed as farmers chase higher per cow
production. In NZ there continues to be land use change out of sheep & beef
and forestry into dairying. The intensification continues despite looming
regional council environmental regulations, urban & political protests. I’m
personally very concerned about the NZ environment & the impact of
dairying. You could argue that “a dairy farmer with money in his pocket is a
dangerous beast” but it does reflect the current wealth of dairy farmers.

One has to be careful generalising about any industry as
there is huge regional & between farmer variations especially in Australia
as the country is so vast & dairy farmers so spread. Climate change and
extreme weather events continue to impact on Australia’s large land mass. Farms
that once were dairy farms now run extensive beef enterprises. To survive in
Australia dairy farmers need to be tough, resilient and have a range of risk
management strategies. Australian dairy farmers are more capable and have
better risk management ability than possibly any other nation. Right now the
industry is losing farms, profitability is generally low, cashflows are under
pressure. There is a loss of confidence despite high international prices. I
saw little or no new on-farm investment and beef where I once saw dairy cows.
Dairy farmers are changing milk buyers looking for a better deal. In NSW where
there were once over 4000 dairy farms there are now just over 700 farms. The
industry financial bench marking data for the year just ended has yet to be
processed.

So why the huge difference between the two industries when
world dairy prices have been at record high levels? I’m not sure I have all the
answers. Both the NZ$ and the Aust$ are at record high levels which tends to
depress farmgate prices and lift imported expenses. Dairy farmers in both
countries are rushing head on into high input, complicated systems with more
infastructure, more purchased feed & generally lower profit margins. In NZ
land prices are increasing at a frightening rate. Dairy Research Foundation Symposium 2014

The definition between
different farm systems is getting blurred & confused. Calving patterns (especially
in Australia) have become very spread and herd fertility is dropping. These
changes are apparent in both countries but more advanced & obvious in
Australia. Everyone talks about pasture based dairy farming but in reality the
pasture/grazing skill base & farmer knowledge is declining. Consultant John
Mulvaney suggests that many dairy farm businesses are being propped up by the
milk price i.e.they are very vulnerable to drops in farmgate milk prices. There are important lessons to be learnt from some of the best Dairy Farmer performances.

Dairy companies in NZ are profitable, efficient at
manufacturing & marketing with SE Asia firmly in their sights. I was
surprised to see in Australia major Co-ops investing heavily into the liquid
market. Are the Australian dairy companies internationally competitive? Have
farmers become production focussed (vanity) rather than profit driven (sanity)?
Farmers in both countries (for slightly different reasons) may be coming more
at risk, less resilient and more vulnerable to exchange rates, extreme weather
events, more variable milk price & input costs. Boom & bust cycles have
different impacts but create similar risks for dairy farmers.

Wednesday, 14 May 2014

The public all have strong opinions about on-farm issues
of Animal Welfare, Water Quality and TB. Individual Dairy farmers and Rural
Professionals need to take a Public Relations leadership position. Social Media
provide powerful tools to take a lead position. We need to make the running and
not be forced to play catch-up on sensitive social issues. Defending the
indefensible is not very smart.

How should farmers respond to Ugly public stories in the
media? I don’t think angry rejection is the right response to these stories in
the press. Letters of denial usually imply a cover up. Best to agree with the
outrage, then state very firmly that these incidents are totally unacceptable.
We must engage with those who are upset and seek a joint understanding and find
community agreed solutions.

I understand farmer’s anger and outrage at all being accused
of animal cruelty, malpractice or being environmental vandals. But we need to
change our public response. We need to set the agenda and present our stories
in a powerful and effective way. We should not allow sensational press to create
crisis events without notice. Most of these sensitive issues are not only
predictable but inevitable.

Every single farmer & rural professional is responsible
for the image & goodwill of agriculture. Every farmer and every rural
professional has a responsibility to improve and protect the image of
agriculture and the food we produce. We need to promote what we are rightly
proud of in our professions and businesses. Equally important is that we
smarten our act if we don’t meet community/consumer expectations. We need to
publically & ruthlessly reject offenders who are non-compliant. The
non-compliant seriously damage the image of every farmer and every rural
professional.

The vast majority of farmers all around the world deeply
care for the animals they work with daily on their farms. Every farmer has a
huge respect for the environment in which they farm. They fully understand that
if they look after their natural resources, soil & water then nature in
turn looks after their farming operations. We need to regularly talk to the
public, the urban consumer and children about the core values of agriculture
& farming.

TB and badgers is a very emotive issue in the UK. Badger
support groups, the media and politicians have dominated the agenda. Now David
has made a bold & very powerful blog to graphically make a farmer statement
& to tell his story. Over 200,000 views world wide of the TB Blog Farmers Guardian Tb Blog success article

Where are our champions? More farmers & rural
professionals need to stand up and actively promote what is good & exciting
about their farms, farm practices & agricultural industries. We need to
promote excellence and good practice. Some individual farmers create the most
fabulous genuine public images for their farm businesses.

Have a look at these examples of Farmers proudly telling their positive stories

Every so often, (not that often) Farmers and Rural
Professionals are confronted by an ugly story that has outraged the press and
members of our community or worse still our customers. Unacceptable farmer
behaviour or practices e.g. Animal Welfare or an Environmental pollution
incidents that hit the press headlines. Part of the problem today is that the
community reaction is not just in the letters to the editor section of our
newspapers. Social Media goes wild with these stories quickly trending
worldwide.

Farmers & Rural Professionals need to be part of the
conversation. Lots of people are talking about farmers and the way food is
produced.

You can’t be part of the conversation if you are not at the
table.

Farmer reaction and official industry response in my view
has been unhelpful and may well have been detrimental to the image of farming
in NZ. Recent incidents include cruelty to dairy calves on NZ dairy farms in
Chile, Animal cruelty to exported Australian beef in Indonesian abattoirs and a
New Zealand survey published by NZ Fish & Game Survey Results
regarding public perception of NZ dairy farmers and river water quality. Let’s
not shoot the messenger but rather address the problem.

Maori Trust farms in New Zealand have a “Quadruple Bottom
Line” business objective of “Culture, People, Environment and Profit” not
solely a profit motive that is driven by self-interest and an individual
approach.

Much could be learnt from the Maori worldview and the ethic
of Kaitiakitanga….or stewardship to emphasise and illustrate the
interconnectedness of life. This is an Indigenous people’s wisdom that is
consciously created through reciprocal relationships with both people and
ecosystems. It is a long term view for all people (both inside and outside the
farm gate) and the environment so that their business has real relationship
strengths.

Sunday, 13 April 2014

What is dairy farm profit? Is profit a dirty word? Too few New Zealand
dairy farmers know their profit? Discussion groups rarely discuss or compare
profit. Few farmers financially benchmark. Why do farmers and consultants
continue to use profit per hectare to compare farms?

Non-Cash Adjustments include changes in feed & livestock
inventory, inclusion of Family labour & Management and depreciation. See NZDairybase

Why do so few NZ dairy farmers know what their profit is? Profit
per hectare is not enough, although every farmer should calculate
Profit/hectare.

Operating Profit Margin (OPM) is a better measure of financial
efficiency. Dairy farms should aim to have a consistant OPM of greater than 40%
i.e. Operating Expenses (which include Family Labour adjustment and
depreciation) not to exceed 60% of Gross Farm Revenue (GFR).

Return on Equity
(RoE) and Return on Assets (RoA) are very important profit metrics.

In NZ there is a trend to more intense farming systems (more
System 4 & 5 and less System 1 & 2). New Zealand farmers have a
comparative advantage in growing pasture. So pasture efficiency & grazing
management remains a core fundamental (in NZ) and is directly linked to
profitability. NZ does not have a comparative advantage in TMR, cereals or
purchased feeds. The choice of farm system, high or low input, TAD or OAD
milking, is a personal decision.

System 1 -
All grass self-contained, all stock on the dairy platform No feed is imported. No supplement fed to the herd except
supplement harvested off the effective milking area and dry cows are not grazed
off the effective milking area.

System 2 -
Feed imported, either supplement or grazing off, fed to dry cows Approx 4 - 14% of total feed is imported. Large variation in % as in
high rainfall areas and cold climates such as Southland, most of the cows are
wintered off.

System 3 -
Feed imported to extend lactation (typically autumn feed) and for dry cows Approx 10-20% of total feed is imported. Westland - feed to extend
lactation may be imported in spring rather than autumn.

System 4 -
Feed imported and used at both ends of lactation and for dry cows Approx 20 - 30% of total feed is imported onto the farm.

System 5 -
Imported feed used all year, throughout lactation & for dry cows Approx 25 - 40% (but can be up to 55%) of total feed is imported.

*Note: Farms feeding 1-2kg of meal or grain per cow
per day for most of the season will best fit in System 3.

OneFarm Research has shown that the difference in
profitability between systems is insignificant. Operating Profit was a poor tool
to compare different systems because it doesn’t take into account the
additional capital invested as farms intensify.

Farms must be profitable to be sustainable in an
increasingly turbulent world. Sustainability in dairy farming includes being
environmentally, people and animal welfare sustainable as well as profitable. Which farming system you chose for your business depends on what you most like
doing, the lifestyle you wish for your family and your attitude toward risk.

There are both upside risks (e.g. opportunities like
increased milk price or excellent grass growing season) and downside risks
(e.g. negative impacts like milk price dropping, droughts or interest rates
rising) in agriculture. The farm businesses that capture upside risks/opportunities
are different from the farm businesses that best cope with adverse or downside
risks.

The most important Key Performance Indicators (KPIs) are
Operating Profit Margin (OPM) and Milk Solids per hectare.

In NZ, System 3 farms which are neither high nor low input
tended to be more resilient over different seasons and had greater ability to
flex with the season.

Profit alone (or worse still at any cost) should not be sole
purpose for being in business. Rather it is an essential to enable farmers to
achieve their personal & family goals. A balanced business scoreboard is
the target not just profit. Increasingly society will impose a ‘license to farm’
on all farmers that will include environmental, animal welfare and people
sustainable objectives.

What is your business mission or vision? Is your farm business
vision written? What are the values that drive & steer your farm business?

Much could be learnt from the leading Maori Trust farms in
New Zealand that have a “Quadruple Bottom Line” business objective of “Culture,
People, Environment and Profit” not solely a profit motive that is driven by
self-interest and an individual approach.

Tuesday, 8 April 2014

"Agriculture,
science …. And stuff like that"

“Agriculture,science and stuff like that”is a new blog created by AgResearch
scientist Jill Walcroft as part of an action research project investigating the
ins and outs of science communication with social media.

I
believe that science ideas are worth exploring and discussing, especially
science to do with land. I feel that sometimes science is not very accessible. So I’ve given myself a challenge, “can I
present the stories in such a way that people’s eyes don’t glaze over after the
first sentence”.I am also keen to
understand the reasons scientists may or may not see social media as a good
avenue for communicating their scientific findings, and to hopefully find ways
of enabling scientists to uptake up these technologies with some confidence.

About Me

Tom Phillips proudly a Kiwi. I'm based at the New Centre of Excellence in Farm Business Management, Massey University, New Zealand.The Centre is a joint project of both Massey & Lincoln Universities. International Low Cost Pasture based Dairy Industry Consultant has worked in New Zealand, Australia, Taiwan, United Kingdom, Ireland & France.Expert in grazing management & dairy farm business management,Onfarm Discussion Group facilitation & training.
I am a strong advocate for pasture based dairy farming partly because it is environmentally & animal friendly with a low carbon footprint but also it creates a profitable strong business which is family friendly.